SUMMARY
Lebanon’s economic crisis, primarily caused by the country’s rapacious politico-banking elites, has decimated pension entitlements for thousands of Lebanese syndicate members. Over their working lives, members have made regular contributions to syndicate pension funds, aiming to secure a comfortable life after work for themselves. Unfortunately, the value of these savings has plunged during the crisis, with most funds being denominated in the heavily devaluated Lebanese Lira. Syndicate members have watched on, aghast, as their retirements evaporate. As just one example, an actuarial estimate suggests that the Engineers’ Syndicate lost around $240 million in savings accumulated since the 1960s.
In truth, the economic crisis also caught the country’s syndicates off guard, exposing a raft of poorly crafted, short-sighted policies. Most syndicate pension funds offered unrealistically generous terms to members, which did not promote the long-term financial sustainability of members’ savings. To make matters worse, pension fund administrators did not pursue diversified investment strategies, relying overwhelmingly on depositing money with Lebanon’s now insolvent banks.
Moving forward, syndicates and their members face two considerable challenges. Without delay, syndicates must act to salvage members’ pension funds to the greatest extent possible. This requires that syndicates participate meaningfully in any IMF bailout negotiations, as well as other processes aimed at allocating the banking sector’s losses. At such discussions, members must ensure that their representatives act faithfully and defend bargaining positions that maximise each pension funds’ value. Beyond the negotiations, Lebanese syndicates must overhaul the future administration of pension funds, making their members’ retirement plans less vulnerable and more sustainable.
UNFAIR ALLOCATION OF LOSSES
Lebanon’s financial collapse has jeopardised the financial security and well-being of thousands of Lebanese workers, with heightened severity for the elderly. Syndicate pension funds perform a vital role in Lebanon, where the national social protection system is mainly characterized by low coverage and poor coordination.1 Many professions – from fields as varied as lawyers, doctors, engineers, pharmacists, nurses, and schoolteachers – rely on private syndicates to manage their life savings. Aside from family and charitable organisations, syndicate pension funds offer the only real safety net for retired Lebanese professionals. Accordingly, syndicate members rely heavily on salvaging their savings from the country’s economic meltdown – especially those members who are either retired or nearing retirement, and therefore have no serious capacity to rebuild their nest-eggs.
Unfortunately, syndicate members are already facing formidable opposition to recovering their full pension entitlements. Throughout the economic crisis, Lebanese commercial banks have tried to shoulder their customers with the burden of the financial sector’s losses. Syndicate pension funds rank among the leading creditors of Lebanese banks, having deposited billions of dollars’ worth of collective savings over decades. For this reason, banking elites will vehemently oppose honouring the true value of syndicate pension funds, despite having flagrantly breached several Lebanese and international laws. In these efforts, Lebanon’s bankers can almost certainly count on continued support from the country’s central bank, the Mikati government, and the nation’s compromised judiciary. Each of these institutions has abetted the financial sector’s efforts to shirk accountability for squandering depositors’ money, including the savings of syndicate pension funds.
FLAWED PENSION SCHEMES
Since October 2019, Lebanon’s economic crisis has shone light on glaring deficiencies in how many syndicates manage collective pension funds. First, pension schemes have long promised benefits to syndicate members that are not commensurate with their personal fund contributions. On average, syndicate members are currently entitled to receive yearly disbursements that are 13 times larger than their annual contributions to the fund while working. In addition, most pension funds allow for members’ spouses and children to continue receiving disbursements after a member’s death. By contrast, OECD countries typically guarantee that pension scheme beneficiaries contribute around 19 percent of their wage to the fund and, upon retirement, only receive 50 percent of their former salary in disbursements. Usually, only spouses can claim continued access to disbursements after the direct beneficiary’s death.
At this point, it is evident that OECD countries have developed more financially sustainable pension plans than Lebanese syndicates. Members receive benefits that directly correlate to their fund contributions (known as a “defined contribution” scheme), as distinct from receiving generous promises of a guaranteed standard of living post-retirement (known as a “defined benefit” scheme) if they pay an arbitrarily set contribution amount during their careers. While a defined benefit scheme is noble in principle, upholding the concept of wealth distribution, the current system seriously undermines the funds’ overall sustainability. Syndicate pension funds would have struggled to meet these sweeping covenants to all their members, even without the economic crisis stripping away the funds’ true value.
Syndicate pension funds also require urgent, comprehensive reforms to their investment strategies. When investing members’ collective fund contributions, syndicates relied overwhelmingly on depositing huge amounts with Lebanese banks, believing that it constituted a safe investment. In addition, syndicate regulations allowed for deposits to be denominated in Lebanese Lira, without requiring that they be indexed to inflation. Best investment practice, especially in the context of pension funds, dictates that a fund administrator should diversify the collective asset portfolio and therefore minimise exposure. Lebanon’s economic crisis has cruelly illustrated the dangers of concentrating fund assets in one type of investment, as Lebanese banks have repeatedly defaulted on their outstanding debts to creditors, which include syndicate pension funds. Moreover, the Lebanese Lira’s depreciation has slashed the real value of savings held in Lebanese currency, without providing for adjustment based on Lebanon’s rampant inflation rate.
These poor management decisions reflect the weak governance laws that apply to many Lebanese syndicates. For example, most pension funds worldwide require that the fund administrator commission an actuarial report every year. In Lebanon, only the Order of Nurses conducts a mandatory actuarial review of the fund’s structure and annual performance. From an administration perspective, syndicates lack proper governance structures, which impedes the pension funds’ efficient management.
RECOMMENDATIONS
Defending accrued pension entitlements
First and foremost, syndicates must immediately work towards salvaging the accrued pension entitlements of syndicate members. Through no fault of their own, syndicate members have watched their life savings virtually disappear, falling prey to decades of greed, incompetence, and financial mismanagement. The following steps can help the syndicates to press for the maintenance of accrued benefits’ true value.
Calculate the funds’ losses. Syndicates must calculate their losses since October 2019, considering the collapse of the Lebanese Lira. Any negotiation with government agencies and commercial banks must therefore proceed from the value of the fund’s assets before the crisis. Once losses are determined, a solution is needed to ensure the sustainability of the funds and their ability to maintain the purchasing power of pensions and health obligations.
Create a new, united front for bail-out negotiations. As a newly formed alliance or coalition, syndicates should circumvent the banks and communicate directly with the IMF to push for a bail-out plan conditioned on the implementation of technical reforms. To do so, syndicates will need to present a united front and ensure a seat at the table for any dialogue, discussion, or negotiations regarding future financial plans to ensure that the losses are distributed to those who caused the crisis and not those affected by it. Not doing so will risk the disintegration of syndicates at the expense of the banking sector and its recovery.
Adhere to common, fundamental negotiating stances. Syndicates should base their negotiation position on the below key principles, which should help to maximise the funds’ value:
- Exempting syndicate accounts from capital controls regime. At present, syndicate accounts do not benefit from “special status” exemptions to the illegal capital controls regime, like certain NGOs and individuals enjoy. Syndicates should insist that they be able to access accounts on behalf of syndicate members without limitations imposed under capital controls.
- Ensuring the sustainability of the pension funds. The political objective of any negotiations with banks or the state must ensure the continuity and sustainability of pension funds. Continuity and sustainability should be touted as the primary way to preserve Lebanon’s economy and the middle and low-income earners. Any solution that goes against this principle must be rejected to preserve the rights of the syndicates’ members.
- Maintaining the value of the Lebanese Lira. Since most of the syndicates’ investments and financial obligations to members are in Lebanese Lira, the value of the local currency must be preserved under any deal. Any approach that turns deposits from foreign currency into Lebanese Lira needs to be rejected because it devaluates deposits. Syndicates’ positioning on any proposed financial solution from the government should therefore be based on the need to curb inflation, as well as restructuring and restoring the banking sector. Syndicates must reject any plan that is not clear and transparent, and that does not restore confidence in the banking sector. Syndicates should also push for the adoption of a government financial plan that rebalances the balance of payments through an anti-corruption public procurement measures and mechanisms that combat waste of public money.
Lobby the international community to support pension fund claims. Syndicate members should petition international organisations with a focus on workers’ rights, such as the International Labour Organization (ILO), to intervene on their behalf in pension fund negotiations. The lobbying campaign should emphasise that Lebanese syndicate members rely overwhelmingly on pension fund disbursements after retirement, given the country’s weak social protection regime. Moreover, syndicate members do not bear responsibility for Lebanon’s economic crisis; Lebanese banks, by contrast, have violated various domestic and international laws in restricting access to members’ life savings. For these reasons, the international community should support syndicate members in pursuing access to their pension entitlements during upcoming negotiations.
Pursue legal recourse against debtor banks. Syndicates can impose further negotiating pressure by suing Lebanese banks, especially under foreign and international laws.2 In doing so, syndicates should consider the following legal principles:
- Syndicates can file lawsuits as a legal entity. Under the Labour Code, syndicates have the right to file claims to preserve and protect their members’ rights. Syndicates can therefore file cases to get their deposits back and the claim damage for not being able to withdraw funds from the accounts. In Lebanon, there are no “collective actions”, therefore the syndicates themselves should initiate any legal action. Filing a lawsuit as a syndicate also increases their lobbying power, instead of filing as individual account holders.
- Suing under civil law, rather than commercial or criminal law. Syndicates should sue under civil law because it considers that the money was deposited “in trust” with the banks and, therefore, must be reimbursed in dollars. Under civil law, pension funds include the main syndicate account and those of the beneficiaries. A pension fund either includes (1) a main account and sub-account for beneficiaries, or (2) a main account which then transfers money to beneficiaries’ personal accounts. In the first case, syndicates should file the lawsuit alone. In the second case, the syndicate should initiate the lawsuit, with the beneficiaries following suit by filing individual lawsuits to apply further pressure. Suing under commercial law would mean considering the money as a “debt” and therefore banks could technically refund the funds in Lebanese pounds, rather than in US dollars. Previous lawsuits under criminal law have stagnated due to a lack of political will.
- Suing under two legal arguments. Under civil law, syndicates can either sue on the basis that the bank breached their contract. Or, on the basis that the bank did not exercise its due diligence and did not inform the depositors that they were investing money in high-risk financial projects.
- Suing under international law. Syndicates are Lebanese, with Lebanese members and money inside Lebanon. Therefore, they do not have jurisdiction under international public law because foreign courts do not have jurisdiction over their case, as the syndicates and the accounts are Lebanese, in civil cases. However, international public law tools are available for political pressure. The syndicates can also use the banks’ blatant breach of international law as a lobbying tool in their political negotiations. Furthermore, it is highly recommended for members of syndicates holding foreign nationality to submit case files in front international courts.
*Please note that this position paper does not purport to offer legal advice. Readers should contact a legal practitioner for advice with respect to any particular matter.
Reforming pension fund schemes
Create more financially sustainable pension fund schemes. Syndicates must launch financial and administrative reforms to move from the current “defined benefits system” to a “defined contribution system”. Syndicates need to work with experts to develop a more equitable and sustainable system that provides multiple options for pensioners. In the short term, the current defined benefit scheme could be converted to an end-of-service indemnity scheme with an option for early retirement, which has a lower risk compared to existing retirement schemes and provides a cash lump sum to the member on retirement.
A new defined contribution scheme needs to be introduced for new members, also giving older members the option to switch to the new scheme after calculating their previously accrued pension entitlement by an actuary. In addition, syndicates could also consider setting a minimum pension as a safety net for all members. Other reforms include indexing the pension funds to the general inflation level and raising the retirement age because of the aging population. Benefits to members’ survivors also need to be limited to the spouse, with no benefits for parents or children.
Reforming funds’ governance and administration. Syndicates should clearly separate the ownership (board of directors) and management (executive team) of pension funds, in line with corporate governance best practices. The executive team should look after the day-to-day operations, while the board of directors oversees and monitors the management team. Assets management and investment need to be outsourced to financial institutions – such as investment banks, insurance companies – with a clear control and review process and audit requirements. IT systems need to be upgraded for proper record-keeping of members and monitoring of pension fund performance. Some syndicates could consider outsourcing pension management to third party administrators in the private sector.
Preparing an actuarial analysis and risk assessment of pension funds. Syndicates, with the help of actuaries, need to develop a clear vision for the design of their retirement plans. Pension fund sponsors appoint actuaries to assess the funding position of their fund on a yearly basis and to set a funding strategy to make sure the fund is meeting its long-term liabilities towards their members. An actuarial valuation is crucial for any pension fund to define a negotiating position based on numbers. It quantifies the present value of assets and liabilities of the pension fund over the lifetime of existing members based on a set of demographic and financial assumptions. The findings of the actuarial valuation would help syndicates understand what has gone wrong and what can be done in the future to avoid adverse financial outcome.
Implementing a funding and investment strategy. Syndicates must learn from their past mistakes and implement proper funding and investment policies with the help of independent advisors. New funding strategies need to figure out how the pension fund liabilities are best met going forward while maintaining a stable level of contribution rates. Pension funds need to ensure they are accumulating assets equal to their benefits obligation over a reasonable period. The investment policy should define three main components: long-term return on investment; acceptable risk level; and asset classes in which the money should be invested. As mentioned above, the syndicate should then appoint an actuary to carry out an actuarial valuation on yearly basis to ensure that the pension fund is sustainable and that it is meeting its funding objectives.
ANNEX: FINANCIAL TERMS GLOSSARY
Defined benefit scheme: a type of pension plan that provides workers a guaranteed income for life when they retire irrespective of each member’s contributions made to the plan prior to retirement. Employers guarantee a specific retirement benefit based on factors such as the employee’s salary, years of service and age.
Defined contribution scheme: a type of pension where the workers’ contributions and their employer’s contributions are both invested, and the proceeds used to provide a pension and/or other benefits at retirement based on accumulated contributions for each member with interest.
Actuarial valuation: a study of a pension fund’s assets versus liabilities to determine the fund’s solvency and long-term financial sustainability.
Consumer Price Index (CPI): used to measure inflation by calculating the average change in price over time that people pay for goods and services.
